Virginia International University

MBA/ GOVT 614

Dr. Zelalem Chala
Final Exam
Posted on 04/19/2021
Due 04/21/2021 by 5:00 PM

Name_Anna Anchutina

Give a short and concise answer for the following five questions

1) Let us say you are a manager of a given Multinational Corporation and requested to
solicit a fund of $300 Million for a new project. Explain the source of fund you will
be looking for? Tell us the step-by-step action you will make in getting this fund
from the sources you identified.

Multinational corporations have several sources of funds:

 Internal: retained earnings, intracompany debt, funds from sister affiliates
 External: debt, equity, or loans
The companies can raise money internally, meaning that they can use the retained
earnings accumulated from previous years and not paid out in the form of dividends, or
they can use money from a parent company or within the corporate family. They can also
raise money externally: they can get a loan, or they can issue debt in the form of bonds or
issue and sell the stock of the company (equity).
When a multinational corporation is raising money internally it is easier. If the company
is using the retained earnings, no additional actions are required, because the company
already has the money available in various forms. For intercompany debts the company
needs to prepare a loan agreement with the project specification and send it to the
management of the parent or sister company.
When the money is raised externally, they can be raised locally or internationally. The
company can get a loan from local banks, euromarket or from international non-
governmental organizations. In this case, the company should talk to the financing
organization and explain the needs for financing. The financing organization may agree
or not to provide the loan.
For debt the company can issue bonds and place them locally, on a foreign bond market
or euromarket. First, the company needs to present the project to the bank and persuade
the bank about the need for financing. Then the company should obtain a rating from a
rating company. Then the legal documents are prepared. The next step is to present the

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 company to investors. The purpose of this presentation is to gauge the price range and
maturity of bonds. Finally, the bond is placed on the market.
When issuing stock, the company should take the following steps. First, decide on how
much capital to raise ($300 million in the example case). Then, to decide how many
shares to issue and set the value of each share. On the next step the company should
decide whether it wants to be public or private. Them the company should choose what
type of stock the company is issuing. If the company wants to go public it should register
with the SEC or other local government body which regulated the trade of stocks, bonds
and other investments. If the company wants to stay private, at the next step the company
is looking for investors and presenting them their company and projects. Finally, when
the stock is issued, a shareholder agreement is prepared and signed.
2) Many people confuse purchasing power of a money with inflation. What is the
difference between the two concepts? How do you estimate the purchasing power
from inflation? Give example for both.

Purchasing power of money is the quantity of goods and services which one can buy with
a unit of currency. Inflation is the decrease in purchasing power of money. Inflation rises
the price level increasing the cost of goods. With all other factors equal, inflation erodes
the purchasing power of money because if the prices are rising the purchasing power of
money is deteriorating with time, meaning that one will be able to buy less goods and
services with one unit of currency.

Example: in Canada with 100 CAD one can buy a pair of boots. The purchasing power of
CAD is 1/100 = 0.01 pair of boots. The inflation in the country was 3%, which means
that in a year the same pair of boots will cost 103 CAD. The purchasing power of 1 CAD
with the new price will be 1/103 = 0.0097 pair of boots, which means that the purchasing
power of CAD was eroded by the inflation.

3) What makes the political risk difference than sovereign risk? Give two examples
about the case of political risk and sovereign risk.

Political risk is the risk for investors that the political situation in a country where they
are planning to invest will change in the way that it will materially affect the profitability
of their investments or their business performance.

Sovereign risk is a probability that the nation’s government will default on its sovereign
debt and will not be able to make principal and interest payments on the debt. While a
sovereign risk is a part of the political risk, the political risk is not a part of the sovereign
risk.

Example of a political risk: an investor is planning to invest in Country X. He will

evaluate the political risk and the business climate before making a decision and decides
that he can absorb the risks invests money. However, in a year the political situation in
Country X deteriorates and the ruling government decides to nationalize all foreign

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 assets. Political risk materializes, and the investor lost his money.

Example of a sovereign risk: a rating agency S&P has recently evaluated a political and
economic situation in Country Y and decided to downgrade Country Y in its sovereign
risk ratings from CCC (which means that Country Y was vulnerable but still dependent
on favorable business, financial and economic conditions) to C (which means highly
vulnerable to nonpayment). Several months after S&P decreased the rating of Country Y,
the country defaulted on its obligations.

4) How do you make a decision if you are offered a job offer in two countries such as
Saudi Arabia or Canada? Explain your decision by giving example.

In order to make a decision which job offer to choose we cannot just convert the salary in
one country into the currency of the other country using regular exchange rates. We need
to take into account the purchasing power of the currencies. When comparing income in
Saudi Arabia with the income we can get in Canada, we need to working with the PPP
exchange rate and see how much a salary in Saudi Arabia is worth in Canadian dollars.

Example: Offer in SA – 150,000 Saudi Riyal, Offer in Canada – 50,000 CAD.

Current exchange rate = 0.34 CAD/ Saudi Riyal
PPP exchange rate = 0.27 CAD/Saudi Riyal

Income in Saudi Arabia in CAD = 150,000* 0.27 = 40,500 CAD

40,500 CAD < 50,000 CAD, therefore, we should accept the offer in Canada.

5) Explain the different methods by which an importer can make a payment to an

exporter. List them in increasing order of risk to the importer and to the exporter.
Give one practical example in passing through this export -import process.
There are 4 variants of how an importer can make a payment to an exporter. They are:
Sales on open account -> Documentary collection -> Documentary credits -> Cash in
advance. Cash in advance of the riskiest method for an importer because it is a risk that
the importer will make a payment in advance and doesn’t get the goods he paid for. The
risk becomes higher when the importer doesn’t have long business relationship with the
exporter. The least risky type of payment is sales on open account, because it gives the
importer an option to get the goods first and pay later.

Example of export-import process with documentary collection: An importer is

establishing business relations with a foreign exporter. In a sales agreement they agree to
a documentary collection as a payment method. The exporter prepares a bill of exchange
(which provide the instructions about the required documents, payment amount due,
terms of payment and the details of title transfer for goods) and sends it to his bank which
is sending it to the bank of the importer. Then the goods are shipped, and the exporter
send the shipping documents including a commercial invoice, a bill of lading and other
shipping forms to the bank. The exporter’s bank ensures the receipt of all the required
documents and forwards them to the importer’s bank. Then, the importer’s bank releases
the documents according to the instructions specified in the bill of exchange: either when

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the importer fully pays on the receipt or when the importer signs the acceptance of terms
that commit to his future payment. After that the importer receives the documents from
his bank and uses the, to receive the goods at the customs and pass all the clearing
formalities. Finally, the importer’s bank transfers the importer’s payment to the
exporter’s bank account. If the importer doesn’t pay then the exporter needs either to find
another buyer, to pay for the return transportation or to abandon the merchandise.